Question

A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the firm’s production process more efficient which in turn increases incremental cash flows. The GSU-3300 produces incremental cash flows of $25,000.00 per year for 8 years and costs $100,062.00. The UGA-3000 produces incremental cash flows of $29,912.00 per year for 9 years and cost $124,917.00. The firm’s WACC is 9.53%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

Can you show me how you solved even if it was done in excel. Thanks!

Answer 1

Equivalent Annual Annuity of GSU-3300

= - Initial cost/ Present value annuity factor + incremental annual cashflows

= - 100062 * i/(1-1/(1+i)^n) + 25000

= -100062* 0.0953/(1-1/1.0953^8) + 25000

= $6563.70

So, purchasing GSU-3300 gives a value equal to annuity of $6563.70 every year

Equivalent Annual Annuity of UGA-3000

= - Initial cost/ Present value annuity factor + incremental annual cashflows

= - 124917 * i/(1-1/(1+i)^n) + 29912

= -124917* 0.0953/(1-1/1.0953^9) + 29912

= $8624.91

So, purchasing UGA-3000 gives a value equal to annuity of $8624.91 every year

So, purchasing UGA-3000 is a better option